Arsenal Energy Inc.

Arsenal Energy Inc.

November 13, 2008 17:13 ET

Arsenal Energy Inc. Announces Third Quarter 2008 Operating and Financial Results

CALGARY, ALBERTA--(Marketwire - Nov. 13, 2008) -


Arsenal is pleased to report its Q3 2008 results. During Q3 Arsenal participated for a 35% WI in a Bakken light well in Stanley, North Dakota. The well was completed in early November and was flowing at a rate of 1200 bbl/d of oil on cleanup.

Subsequent to quarter end, Arsenal closed its previously announced acquisition of GEOCAN Energy Inc ("GEOCAN"). The combination added approximately 800 bbls/d of production and 1.8 million boe of proven producing reserves for a purchase price of $30 million in cash and the issuance of 10.6 million shares of Arsenal. After closing in October, Arsenal was producing at approximately 2700 boe/d with net debt plus working capital deficiency of approximately $54 million.

High oil prices at the beginning of the quarter resulted in strong netbacks and cash flows for the third quarter. However, prices dropped precipitously during the quarter so it is anticipated that Arsenal's operating margins will contract significantly in Q4.


- Average production of 1767 boe/d vs. 1909 boe/d in Q2

- Operating netbacks of $55.70 per boe vs. $51.77 per boe in Q2

- Quarterly funds from operations of $8.1 million vs. $8.1 million in Q2

- Quarter end total debt + working capital deficiency of $13.4 million vs. $14.3 million in Q2


Arsenal showed a pretax profit of $12.9 million for the third quarter. Arsenal booked an unrealized mark to market gain of $9.5 million on an 800 bbls/d hedge position. Excluding that gain, Arsenal would have shown a pretax profit of $3.4 million.


The company has established three key plays at Evi Alberta, East Central Alberta, and Stanley, North Dakota. In the third quarter, Arsenal participated in the drilling of 6 gross (5.4 net) wells resulting in 3 gross (2.4 net) oil wells. Arsenal expects to drill 3.2 (1.2 net) wells in the fourth quarter.

With the acquisition of GEOCAN, Arsenal has added 350 bbls/d of oil production to its East Central core area and added a new core area in NE British Columbia.


During Q1 all of Arsenal's production was tied in to a central battery. Operating costs for the field dropped from $22.86 per bbl in Q1 to around $8.31 in Q3. Two (0.7 net) locations have been selected for drilling in the fourth quarter and Arsenal has an additional 4 other locations in inventory.


At Galahad Arsenal drilled five (5 net) wells in Q3. Two wells were completed and three were abandoned. One well tested gas at 3 mmcf/d and one tested 180 bbls/d of 27 API oil and at 1 mmcf/d for gas. The wells should be tied in and on production before year end.

Arsenal drilled two (2 net) oil wells at Provost in Q2. One well was completed as a Lloydminster oil well and one was completed as a Rex oil well. The wells were tied in during Q3 and are producing 50 bbls/d of net production.


Arsenal has 1896 net acres of Bakken deep rights in the Stanley area. In September, Arsenal participated for a 35% WI in a horizontal Bakken well with a 2,700 meter horizontal lateral. The well was completed and stimulated in early November and is flowing at a rate of 1200 bbl/d of oil. After a couple of months of flush production, these types of Bakken wells typically produce at stabilized rates between one third and one quarter of their test rate.

Arsenal anticipates participating in a number of additional Bakken drills in the coming quarters.


The reference prices received for oil and natural gas were strong going into the third quarter of 2008 and Arsenal's mix of light vs. heavy oil also continued to improve. The average Q3 2008 boe price was $97.00 per boe.


Operating costs averaged $18.39 per boe during the third quarter. This is an improvement from $21.65 per boe during Q2. The addition of GEOCAN Energy Inc. properties and the Stanley Bakken production should further reduce operating expenses in the fourth quarter.


Funds from operations for the third quarter were $8.1 million or $0.09 per share. Closing of the GEOCAN acquisition will increase production volumes in Q4 but the drop in oil prices in Q4 will more than offset the cash flow gain from the increased volumes.


Total debt and working capital deficiency was $13.4 million at quarter end. Subsequent to quarter end Arsenal closed the acquisition of GEOCAN for cash consideration of $30 million and the assumption of $10.5 million of working capital deficiency. The third quarter precipitous drop in oil prices has resulted in financial leverage well above Arsenal's target leverage of one times forward funds from operations.


During Q2 and Q3 Arsenal hedged 800 bbls/d of oil at an average price of approximately $117 per bbl Cdn. The unrealized gain on these hedges on Nov 6 was $13.2 million.


Oil and gas prices weakened substantially from July 2008 to the current date. The additional production volumes from GEOCAN and from wells brought on-stream in Q4 2008, combined with the crude oil hedges should offset the cash flow loss from lower prices. Production in the fourth quarter will be positively impacted by the tie in of the Galahad wells, production from the Stanley Bakken well, and from an extensive work over program that has commenced on Arsenal and GEOCAN properties. The company plans a property rationalization to lower debt and to concentrate efforts on core properties.

Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
Petroleum and natural gas
revenues 15,766,815 7,588,967 43,754,610 23,045,386
Funds from operations(1) 8,093,157 929,874 19,974,306 4,526,820
Per share - basic and
diluted 0.09 0.01 0.23 0.06
Net income (loss) 10,028,193 (3,029,331) 7,614,314 (20,434,807)
Per share - basic and
diluted 0.11 (0.04) 0.09 (0.28)
Total debt (excluding
derivatives) 13,384,766 17,468,428 13,384,766 17,468,428
Capital expenditures 7,432,914 5,891,281 17,110,739 14,255,712
Property acquisitions - - 974,733 -
Property dispositions 1,491,355 1,235,792 15,491,355
Wells drilled - - - -
Gross 6.00 3.00 23.00 9.00
Net 5.35 1.80 18.70 5.35
Shares outstanding - end of
period 90,786,148 73,917,173 90,786,148 73,917,173
Daily production
Heavy oil (bbl/d) 499 715 523 709
Light oil and NGLs (bbl/d) 998 675 939 671
Natural gas (mcf/d) 1,619 1,951 2,029 2,086
Oil equivalent (boe @
6:1)(2) 1,767 1,715 1,800 1,728
Realized commodity prices
Heavy oil (bbl) 97.00 38.47 84.63 40.22
Light oil and NGLs (bbl) 110.14 66.85 103.99 62.40
Natural gas (mcf) 8.07 5.06 8.76 6.72
Oil equivalent (boe @ 6:1) 97.00 48.10 88.72 48.85
Reference pricing
WTI (U.S.$/bbl) 118.36 75.33 113.43 66.17
AECO gas ($Cdn./mcf) 8.02 5.17 8.72 6.53
Foreign exchange
($U.S./$Cdn.) 0.96 0.96 0.99 0.91
Operating netback
($ per boe)
Revenue 97.00 48.10 88.72 48.85
Royalty (21.57) (12.54) (17.66) (11.74)
Operating cost (18.39) (21.33) (20.90) (20.69)
Realized hedging (1.34) - (1.72) -
Operating netback per boe 55.70 14.23 48.43 16.42

(1)"Funds from operations", "funds from operations per share", "netbacks"
and "netbacks per boe" are not defined by Generally Accepted Accounting
Principles ("GAAP") in Canada and are regarded as non-GAAP measures.
Funds from operations and funds from operations per share are calculated
as cash provided by operating activities before changes in non-cash
working capital and asset retirement expenditures. Funds from operations
is used to analyze the Company's operating performance, the ability of
the business to generate the cash flow necessary to fund future growth
through capital investment and to repay debt. Funds from operations does
not have a standardized measure prescribed by GAAP and therefore may not
be comparable with the calculations of similar measures for other
companies. The Company also presents funds from operation per share
whereby per share amounts are calculated using the weighted average
number of common shares outstanding consistent with the calculation of
net income or loss per share.

(2) The term barrels of oil equivalent ("boe") may be misleading,
particularly if used in isolation. A boe conversion ratio of six
thousand cubic feet per barrel (6 mcf/bbl) of natural gas to barrels of
oil equivalence is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead. All boe conversions in the report are
derived from converting gas to oil in the ratio mix of six thousand
cubic feet of gas to one barrel of oil.

Contact Information

  • Arsenal Energy Inc.
    Tony van Winkoop
    President and Chief Executive Officer
    (403) 262-4854
    Arsenal Energy Inc.
    1900, 639-5th Avenue SW
    Calgary, Alberta T2P 0M9
    (403) 262-4854
    (403) 265-6877 (FAX)